The Plainspeak / Loans

A belief · pairs with the Prepayment Player

The debt you could kill, and choose to keep

The spreadsheet says keep the cheap loan. Your nervous system disagrees, and it has a point.

By 37xBetter · a banker's view

You have some money sitting idle and a home loan running for another eighteen years. The clever advice says don't touch the loan: it's cheap, equity returns more, there's a tax benefit, the arbitrage is in your favour. So you leave it alone and feel sharp about it.

The spreadsheet agrees with you. Your nervous system does not, and on this one it is worth listening to.

The arbitrage argument is true on paper and shaky in the life you actually live. It assumes you will invest the difference with perfect discipline for eighteen unbroken years, that the market returns arrive on schedule, and that a loan hanging over you costs nothing beyond its interest. It costs far more than interest. It is a standing claim on your future income. It is the reason you cannot take the pay cut, leave the job that drains you, or fund the bet on yourself. Debt is leverage on your salary, and leverage runs in both directions.

So treat prepayment as buying freedom, not only as chasing a return. A modest extra amount each month, paid early in the loan when almost the entire EMI is interest, strips years off the tenure and a genuinely shocking pile of interest along with them. Run your own loan through the player and watch what just one extra EMI a year does to the total. Then decide with both the number and the feeling sitting in front of you.

It works because in the early years your EMI is almost all interest and barely any principal. Every rupee of prepayment in that window goes straight at the principal and cancels all the future interest that principal would have generated for the bank. The earlier the rupee lands, the more years it kills.

This is not a case for hurling every spare rupee at the loan while your investments starve. Keep investing. But the decision was never purely mathematical. A guaranteed, stress-free return equal to your loan rate is worth more than any spreadsheet will ever score it. One honest caveat: if you still claim the Section 24(b) deduction on your home-loan interest, prepaying gives it up, so your real return is the loan rate minus that break. On the new tax regime, that break is already gone.

Some returns are paid in rupees. Killing a debt early is paid in sleep.